TMI Blog2012 (8) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... P. K., SHRIDHAR V. K., JJ. JUDGMENT Ruling P. K. Balasubramanyan J. (Chairman).- 1. On April 19, 2007, a company "X" floated a tender notice inviting tender inquiries for carrying on the work of all activities and services required for the design, engineering, procurement, construction, installation, commissioning and handing over of the plant on a lump sum turnkey basis for the "y" and associated units of "Z" complex. The work was to be done in accordance with the bidding documents. ABC the applicant before us and a company "E" decided to come together to take up the work as a consortium. With that in view, on March 3, 2008, the applicant and "E" entered into a memorandum of understanding for the purpose of bidding for and taking up the work. This was followed up by an "internal consortium agreement" dated March 14, 2008, between the applicant and "E". On March 20, 2008, the consortium submitted its response to the tender notice. It also submitted its price bid on July 28, 2008. The tender submitted by the consortium was accepted and on December 23, 2008, the work was awarded to the consortium. The issuance of notification of award was on December 23, 2008. Dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endered and had submitted its offer and its adjustment price bid. The tender having been accepted after discussion with the contractor, the contract was being awarded to the con- tractor. After referring to the various documents annexed to the contract as forming part of the contract, it is also recited that the contractor had covenanted with the company to perform the work in conformity in all respects with the provisions of the contract and in consideration of the carrying out and completion of the works by the contractor, the company covenanted to pay the amounts at the times and in the manner described in the agreement. It is recited that the advance payment will be received by the consortium and the right to suspend or terminate the contract is given to the consortium. In this agreement, there is no individual role assigned to the members of the consortium and the agreement is between "X" and the consortium and rights and obligations are conferred on "X" and the consortium for the tendered work as a whole. The agreement annexes the general conditions of contract as amended, technical documents, agreed clarifications, contract price schedule, construction schedule, project inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idance Agreement read with Protocol between India and Germany ('DTAA') ? (iii) If the answer to question No. 2 is in the affirmative, to what extent and at what rate of tax, are the amounts received/receivable for design and engineering liable to tax in India ? (iv) Whether in terms of the contract, the amount receivable by the applicant for supply of equipment, material and spares, outside India are liable to tax in India, under the provisions of the Income-tax Act, 1961, or under the DTAA read with Protocol ? (v) If the answer to (iv) is in the affirmative, to what extent are the profits from supply of plant an equipment taxable in India ? (vi) Whether in terms of the contract, consideration for onshore services comprising supervision of installation, testing, commissioning and construction, management/supervision is liable to tax on the profits of the permanent establishment, as may be deemed to exist in India, in terms of section 44DA of the Act read with the provision of the DTAA ? (vii) If the answer to question No. (vi) is in the affirmative, whether for the purpose of determining the profits of the permanent establishment in India, the actual expenditure inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roach made by a three-judge Bench of the Supreme Court in Vodafone International Holdings B. V. v. Union of India [2012] 341 ITR 1 (SC). Therein, the Supreme Court has held that section 9(1)(i) of the Act is not a "look through" provision and that the Revenue must look at the transaction to understand its import. The Chief Justice has held "it is the task of the Revenue/court to ascertain the legal nature of the transaction and while doing so, it has to look at the entire transaction as a whole and not to adopt a dissecting approach". This indicates that a dissecting approach from the angle of taxation should not be resorted to and the approach must be to understand the nature and the object of the contract on looking at the transaction. 10. We also feel that a contract for sale of goods differs from a contract for erection and commissioning of a plant which also takes in delivering of design and machinery. To read such a contract as one for sale of goods independent of the contract as a whole and separately from the obligation undertaken thereunder to erect, commission and deliver a plant (the object of the contract), would be adopting a dissecting approach to that contract. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here- in after referred to as 'consortium') in order to prepare and submit a joint proposal as a consortium for the project (hereinafter referred to as 'bid') and if the bid is accepted by 'X' to perform the contract (hereinafter referred to as 'contract') for the execution of the project." The parties agree to co-operate in the preparation and submission of the bid for the project and if the bid is accepted, for the performance of the awarded contract for the project. It is then provided : "As far as the consortium members are concerned, the agree- ment is signed only for the purpose of bidding and if awarded, as a basis for a consortium agreement (consortium agreement) in order to execute the contract." Thus, it is seen that the memorandum of understanding was entered into only for the purpose of preparing and entering a bid. Post-acceptance of bid, it at best is only executory and is only to form a basis for a consortium agreement. The memorandum of understanding provides for participation and allocation of responsibilities in case the work is allotted to the consortium. It provides that the consortium shall constitute an unincorporated arrangement established for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e work under- taken. Normally, when a tender is floated, bid and accepted, the contract can only be consistent with the tender unless specific amendments are made to the tender conditions. We cannot see any such amendment in this case. 16. The internal consortium agreement, remains an internal document, a unilateral arrangement between the members of the consortium. "X' is not a party to it. May be, it was executed in furtherance of the memorandum of understanding recognized by "X". But it is not part of the contract documents. That contract can only be understood as an agreement between the members of the consortium as to the manner in which they should perform their obligations under the contract with "X'. Its terms cannot control the effect of the terms of the tender notice and the contract in terms of it. We are satisfied that the terms of that unilateral agreement cannot alter the legal position emerging from the agreement as we have discussed above. How far an arrangement come to between the members of the consortium can govern the contract, the consortium has entered into with a third party, is a moot question. It remains an arrangement not binding on the person who has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 'X' and acceptance of the plant by "X'. 20. It is also pointed out on behalf of the Revenue that the contract does not specify that title to the machinery shall pass on to "X' on high seas or in the country of origin. It is also pointed out that the price schedule and payment also deals with the entire gamut of works to be performed under the con- tract. There was no mention of offshore or onshore supply of services. 21. Annexure E to the contract containing project instructions indicates that its purpose is to set down the duties and responsibilities for the project participants and the procedures, rules and regulations and other requirements of the company ("X') relating to the performance of the work by the contractor (consortium). Clause 1.2 sets out the requirements for execution of the works. After setting out the details in clauses 2 and 3 thereof, clause 4 deals with financing and accounting. Clause 4.1.2 reads : "Payment to the contractor of monthly invoice for respective members of the consortium as aforesaid shall not be deemed to affect in any manner, the contractor responsibility for carrying out the whole of the works in accordance with the requirements o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the association consisted only of two individuals. The above two decisions were again followed by that High Court in Dwarkanath Harischandra Pitale, In re [1937] 5 ITR 716 (Bom) in a case where the original coming together or association was not a voluntary act on the part of the assessee, but who elected to retain the property and manage it as a joint venture. 25. It does not appear to be necessary to pursue the development of the law thus, in the light of the decision of the Supreme Court in CIT v. Indira Balkrishna [1960] 39 ITR 546 (SC). Therein, their Lordships after observing that the above three decisions correctly lay down the crucial test for determining what is an association of persons within the meaning of section 3 of the Indian Income-tax Act, added the following words of caution. "There is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an association of persons within the meaning of section 3, it must depend on the particular facts and circumstances of each case as to whether the conclusions can be drawn or not". 26. In N. V. Shanmugham and Co. v. CIT [1971] 81 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the work it performs is exclusively by that member. There is no sharing of costs or receipts between the two members inter se. There is also no sharing of assets employed by each of them and there is no sharing of profit or loss. There is also no common employment of capital or resources. As against this the Revenue submits that the tender was called for establishing a project and the bid was by a consortium. The consortium came into being by two independent entities coming together. It was with the common object of bidding for a work. It bid for the work. The work was given to the consortium. The work was taken up by the consortium. The responsibility for establishing the project was that of the consortium. The members came together to undertake a contract. The motive was obviously to generate an income. The liability of the consortium continued after installation and even after commissioning. It was a joint liability. In this situation, an association of persons was formed and the assessment has to be on that basis. 30. What we have to consider is whether the facts and circumstances avail- able, bring about an association of persons in the light of the principles indicated b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ineering work prepared solely for manufacture, procurement of equipment outside India, is done outside the country, even if it constitutes a significant part, the same cannot be viewed in isolation and apart from the contract as a whole. To borrow the expression from the question itself, that work is inextricably linked with the erection and commissioning of the project, a work the consortium has undertaken. Thus, in the face of an indivisible contract and the existence of an association of persons, the claim that the amount payable in respect of design and engineering cannot be taxed in India, cannot be accepted. They are liable to be taxed in India. 34. In view of our answers to questions Nos. 1 and 2, the answer to question No. 3 is that the consortium has to be assessed as an association of persons subject to the relevant provisions of the Act. 35. Similarly, question No. 4 relates to the amount receivable for supply of equipment, material and spares allegedly outside India and its chargeability to tax under the Act. In view of our conclusion that the contract is indivisible and the consortium is to be taxed as an association of persons, the question can only be answered ..... 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